1/06/2009 @ 4:55PM

Saving Social Security With Stocks

The new president and Congress are getting ready to spend close to $1 trillion to stimulate the economy. I hope their plan succeeds in getting our economy back on track, but I am afraid that if the decisions about how to spend the money have to go through the usual congressional budgeting process, a lot of the money will be wasted and we will have little of lasting value to show for the money.

Even for the government, $1 trillion is still a lot of money. It is enough to give us a historic opportunity to strengthen the country’s safety net by putting Social Security on a sound financial footing for generations to come. Here’s how we can do it and stimulate the economy at the same time.

Let’s set up a new trust fund for Social Security with a charter to invest the money solely to get a good return.

In my view, it is important that the trust fund’s investment decisions be made without regard to political considerations. For this reason, I would set it up so the trust is independent of the government, but subject to its oversight. The organizational relationship of the Federal Reserve to the U.S. government is a good model.

We could give the president the authority to appoint eight trustees who, upon being confirmed by the Senate, would serve staggered eight-year terms so that every two years, two of the trustees could be changed. The trustees would then select the investment advisers who would be judged by and held accountable for delivering returns after all fees.

Right now, the U.S. government can borrow money for 10 years for about 2% a year. If we borrow $1 trillion and invest it in stocks, and stock market returns over the next 10 years are just average, the fund would generate roughly $80 billion a year for the Social Security program, net of interest payments.

Actual stock market returns could, of course, be higher or lower, but adding the returns from a $1 trillion portfolio to the Social Security program ought to be enough to put it on a firm actuarial footing.

This would restore confidence to a lot of people who depend on Social Security, as well as anyone who, until last year, was planning to retire solely on their 401(k) or IRA.

The addition of $1 trillion of new capital looking for the best returns would stimulate the healthy parts of the economy by enabling successful companies to expand and start hiring again. I think this is a better approach to creating good jobs than rescuing failing companies or putting people on the government’s payroll.

If we are going to spend $1 trillion, this plan has a better chance of stimulating the economy and leaving a lasting benefit for generations to come than if Congress decides how to spend the money in its usual fashion.